Wednesday, May 13, 2009

2001 Amendment to 2B1.1 Loss-Amount Definition Supercedes Prior Fifth Circuit Law on Calculation of Losses From Ponzi Scheme

United States v. Setser, No. 07-10199 (5th Cir. May 12, 2009) (Smith, Southwick, Rodriguez, D.J.)

Deborah Setser, along with her brother Gregory, "were convicted of involvement in a Ponzi scheme focused on soliciting funds from Christian groups for largely mythical deals involving real estate and retail products." During the course of the scheme, some of the existing investors reinvested funds that had been returned to them as profits. Deborah evidently got involved in the scheme sometime after it had begun.

Deborah appealed her sentence, arguing that the district court got the loss calculation wrong.
The question at the core of the loss-calculation dispute is whether it was appropriate to consider as new losses the funds from existing investors that were reported or returned to them as profits and then reinvested in the scheme. For those situations in which the original investments occurred before Deborah Setser’s involvement, but the reinvestments occurred during her involvement, the effect of including the reinvestments was to increase the loss amount and number of victims attributed to her. Using this methodology, with credit given for money returned to original investors (but not “profits” received by investors), the district court concluded that the loss amount attributable to Setser was $61,601,032.

The Fifth Circuit addressed a similar issue in its 2000 decision in United States v. Deavours, 219 F.3d 400, which held that
no credit should be given for money returned to investors, because money in a Ponzi scheme is returned “not to compensate the victims for their losses,” but “to extend the defendants’] criminal activities and the profitability thereof” by prolonging the life of the scheme. Id. In fact, repayment of invested funds in a Ponzi scheme serves to “increase the total returns from [the] criminal activity, and endanger yet more victims.” Id. at 404.

Deborah argued that Deavours' "reasoning prevents a late-arriving conspirator from being made responsible for losses that occurred from money invested before joining the scheme. Just as a defendant cannot receive credit for returning money to an investor, she cannot be subject to 'double counting' when an investor chooses to reinvest profits in the scheme."

The Government countered that a 2001 amendment to guideline §2B1.1's loss-amount definition supercedes Deavors. The amendment provided that "[l]oss shall be reduced by the . . . money returned . . . by the defendant, to the victim before the offense was detected[.]"
In its explanation of the change to the application note, the Sentencing Commission contrasted Deavours with cases from other circuits that had permitted offsetting of payments to investors up to the amount they had invested. It stated explicitly that the “amendment adopt[ed] the approach of the Eleventh Circuit” in order to “resolve[] a circuit split.”

The court agreed with the Government, holding that "the district court’s method of loss calculation was correct. Deborah Setser was given credit for money that was returned to investors, but such credits were offset when the money was reinvested into the scheme." The court further held that
[u]nder this loss calculation method, it also was reasonable to conclude that investors became “victims” again when they reinvested, thus explaining the district court’s conclusion about the number of victims for whom Deborah Setser was responsible. . . . [T]he rationale for counting the victims a second time is that a new offense occurred when the investors’ money was plowed back into the conspiracy, justifying the different outcome.

Finally, the court rejected Deborah's "'as applied' Sixth Amendment challenge to the district court’s calculation of loss amount and number of victims at her sentencing, and a Fifth Amendment challenge with regard to acquitted conduct for which she claims she was held responsible at sentencing."

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